Excerpt: - p.b. mukharji, actg. c.j.1. in this statement of the case on the income-tax reference under section 66(1) of the indian income-tax act, 1922, the following questions have been raised :' 1. whether, on the facts and in the circumstances of the case, the assessee's claim for the exchange loss of rs. 11 lakhs for the assessment year 1957-58 and rs. 5,50,000 for the assessment year 1959-60 in respect of remittances of profit from pakistan was not allowable as a deduction ? 2. whether, on the facts and in the circumstances of the case, the tribunal was right in holding that law charges amounting to rs. 1,170 and rs. 3,573 incurred in respect of business profits tax appeals for the assessment years 1957-58 and 1959-60 were not allowable as deductions ? 3. whether, on the facts and in the.....

Judgment:P.B. Mukharji, Actg. C.J.

1. In this statement of the case on the income-tax reference under Section 66(1) of the Indian Income-tax Act, 1922, the following questions have been raised :

' 1. Whether, on the facts and in the circumstances of the case, the assessee's claim for the exchange loss of Rs. 11 lakhs for the assessment year 1957-58 and Rs. 5,50,000 for the assessment year 1959-60 in respect of remittances of profit from Pakistan was not allowable as a deduction ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that law charges amounting to Rs. 1,170 and Rs. 3,573 incurred in respect of business profits tax appeals for the assessment years 1957-58 and 1959-60 were not allowable as deductions ?

3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that law charges of Rs. 2,551 incurred for effecting changes in the existing managing agency agreement were not allowable as a deduction for the assessment year 1957-58 ?

4. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that interest amounting to Rs. 5,236 paid on funds invested in shares which produced no dividend income was not allowable as a deduction for the assessment year 1957-58 ?

5. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that interest amounting to Rs. 10,671 disallowed in the assessments for the assessment years 1957-58 and 1958-59 on funds invested in shares was not allowable as a deduction in the assessment year 1959-60 '

2. The assessee has not pressed questions Nos. 3 and 5 as set out above. That position is accepted by the revenue. The court, therefore, will not record an answer on either of questions Nos. 3 and 5.

3. The facts of the case are as follows :

The assessee is Sutlej Cotton Mills Ltd. The statement of the case records that its head office is in Calcutta but its Cotton Mills are in West Pakistan. The assessment years are 1957-58 and 1959-60. The respective accounting years are the financial years ending on the 31st March, 1957, and the 31st March, 1959. The assessee claimed for these two years Rs. 11 lakhs and Rs. 5,50,000 as losses suffered in exchange on remittances of profits from Pakistan. In the accounting year ending on the 31st March, 1954, that is, for the assessment year 1954-55, the Pakistan profits of the assessee as assessed in Pakistan amounted to Rs. 1,68,97,232 at the official rate of exchange of 100 Pakistan rupees--144 Indian rupees prevailing at that time. For the purpose of the assessee's Indian assessment for 1954-55 the Pakistan profits were converted to a higher figure by adopting this exchange ratio and was included in the assessee's total income in India. During the accounting year for the assessment year 1957-58 the assessee obtained the permission of the Reserve Bank of Pakistan to remit Rs. 25,00,000 out of its Pakistan profits for the assessment year 1954-55 to India. But, then, at that time, the remittance was made on the then prevailing official exchange ratio which was 100 Pakistan rupees = 100 Indian rupees. The assessee, therefore, received in India Rs. 25 lakhs in Indian currency in exchange for Rs. 25 lakhs of Pakistan currency.

The assessee claimed that as in its assessment for 1954-55 this amount of Rs. 25 lakhs (Pakistan) bad been included in the Indian total income of Rs. 36 lakhs (Indian), the assessee had suffered a loss of Rs. 11 lakhs when the amount was actually remitted from Pakistan to India. A similar claim for loss was made for the assessment year 1959-60 of Rs. 5,50,000 in respect of the transfer of Pakistan profits of the accounting year ending on the 31st March, 1955, to India.

The claims for losses were disallowed in both the years by the Income-tax Officer who held the claims to be purely hypothetical book losses. On appeal, the Appellate Assistant Commissioner expressed the opinion that the losses claimed were notional losses and, further, that it was not incumbent on the assessee to get the profits remitted from Pakistan to India and the loss in exchange would only be a charge on the profits and not a charge on income. The Appellate Assistant Commissioner disallowed the assessee's claims for losses and upheld the order of the Income-tax Officer. In further appeal before the Tribunal, the Tribunal rejected the assessee's appeals and upheld the orders of the taxing authorities. The Judicial Member of the Tribunal held that there had been neither any loss nor any gain in exchange on the transfer of the amounts from Pakistan to India. In the assessee's books of account in the head office in Calcutta the profits of Pakistan had been shown in rupees and the remittance from Pakistan had also been shown in rupees, without showing any loss in the process or due to the exchange fluctuation between the Pakistan rupee and the Indian rupee. He, therefore, came to the conclusion that there was neither any loss nor any gain in exchange so far as the assessee's own books were concerned. The Tribunal found that the head office books of the assessee disclosed no loss in respect of the remittances from Pakistan. The Tribunal expressed the view that simply because the assessee's profits in Pakistan for the assessment year 1954-55 were included in the assessee's total income in the Indian assessment for that year at an enhanced figure due to the prevailing official exchange rate, it did not follow that the assessee suffered a loss when a portion of such profits was subsequently remitted to India. The Judicial Member held that the profit was illusory in the assessment year 1955-56 and the losses claimed for the assessment years 1957-58 and 1959-60 were also illusory and could not be allowed. The Accountant Member of the Tribunal agreed with these findings but he also gave his own added reasons for coming to that conclusion. The Accountant Member expressed the view that the remittance was merely for the purpose of repatriation of past accumulated profits and, therefore, did not amount to a trading transaction, and, secondly, that, as each year's assessment is independent of the assessment relating to the other years, the loss arising from the remittances of earlier years profits could not be allowed in a subsequent year unless it was proved that such remittances represented the normal flow of circulating capital from a branch to the head office or vice versa and that there was a compelling business necessity for such remittances during the relevant years in which the remittances took place. According to the opinion of the Accountant Member such loss was not prima facie the result of any business or trading activity in this case but was merely the consequence of repatriation of profits earned during earlier years, which due to efflux of time and vagaries of exchange regulations, had shrunk and dwindled in terms of the Indian currency. He, therefore, came to the conclusion that it could not be said in such facts and circumstances that any loss had sprung up directly from the carrying on of the assessee's business.

These are the relevant facts for the purpose of question No. 1 as set out above.

4. The other facts relevant to the other questions set out above may now be briefly summarised. The assessee claimed Rs. 1,170 and Rs. 3,573 as deduction for the assessment years 1957-58 and 1959-60, respectively, as law charges in respect of the business profit tax appeals. These claims were disallowed by the Income-tax Officer on the ground that the amounts were spent for conducting appeals or references against the assessments. The Appellate Assistant Commissioner upheld the order of the Income-tax Officer on the ground that this was not an allowable expenditure under Section 10(2)(xv) of the Income-tax Act, 1922. The Tribunal rejected the assessee's claim on appeal and upheld the orders of rejections by the Income-tax Officer and the Appellate Assistant Commissioner. On those facts question No. 2 has been asked.

5. The third question raises the other item of Rs. 2,551 claimed as a deduction on account of law charges for the assessment year 1957-58 and it would be unnecessary to describe the facts on the point as this question is not being pressed.

6. The next question No. 4 raises the item of Rs. 5,236. The relevant facts appear from paragraph 7 of the statement of the case. The assessee's Jaitu branch moneys which had been borrowed were later invested in the shares of Gwalior Rayon and Silk ., and interest amounting to Rs. 5,236 and Rs. 5,435 respectively were claimed as deductions as interest paid on such borrowings in the assessment years 1957-58 and 1958-59. The claim for these two years was disallowed on the ground that as the income from dividend was taxable under Section 12 and that in these two years there was no income from such dividend the amount of interest was not allowable as a deduction for these two years. The Tribunal held that as there was no dividend income from the investment the claim for interest had rightly been disallowed for the assessment year 1957-58 following the decision of the Calcutta High Court in Madanlal Sohanlal's case.

7. The major question involves the character, quality and the incidents of exchange loss by reason of the fluctuation in foreign exchange caused by devaluation which is an act of the State. Shorn of all their complications and details, the plain questions are (1) is this a loss at all, (2) if it is, is it a businessjoss in any event, and (3) what is the year of reference to which such a loss is to be attributed and is such a year of reference the year in which the assessee chooses to remit or repatriate the money ?

8. A preliminary ground may be cleared at the outset. This is not a case of deducting any of the allowances specified in Section 10(2) of the Income-tax Act, 1922. The simple reason is that this exchange loss does not answer any of the listed allowances in Section 10(2) of the Act. It does not come also under the residuary section of Section 10(2)(xv) for the simple reason that such an exchange loss cannot be considered as an 'expenditure'. The reason for clearing the deck at the outset in this manner is to avoid the confusion into which apparently the Accountant Member of the Tribunal fell on this point.

9. If any deduction or allowance has to be made of such an exchange loss, it can only be made indirectly by interpretation of Section 10(1) of the Income-tax Act, 1922, and by interpreting the word 'profit' so as to include a kind of surplus or residue after deduction of such an exchange loss, or else there would be no statutory authority for allowing such a deduction on the ground of exchange loss. The question, therefore, in a nutshell is whether, in calculating or computing or working out the net profits of a business under Section 10(1) of the Income-tax Act, such a kind of loss, which, an assessee is supposed to suffer by the fluctuation of the foreign exchange by the act of devaluation by a State, can be deducted.

10. Before discussing authorities on this point, we shall first state our reasons on principles independently of the authorities.

11. We shall take up first the question whether such a loss is at all a loss. Mr. Pal for the revenue contends that it is not a loss at all. He submits that it is only notional and illusory and there is, in fact, no loss suffered by the assessee for which any claim could be made. He supports this branch of his argument by the fact that the assessee does not register this loss in any of the books of the company. This loss is not shown or registered either in the profit and loss account or in the balance-sheet or in the books of account of the assessee. Therefore, it is contended for the revenue that there is, in fact, no exchange loss as such. Secondly, he invokes the proposition that each assessment year is complete and independent under the Income-tax Act and, therefore, the prevailing rate of 100 Pakistan rupees equivalent to 144 Indian rupees was rightly applied at the time for the relevant year concerned. For this purpose, Mr. Pal for the revenue relies on the two well-known decisions, one of the Privy Council and the other of the Supreme Court : Commissioner of Income-tax v. S. M. Chitnavis and Kikhabhai Premchand v. Commissioner of Income-tax, : [1953]24ITR506(SC) . In the first case, the Privy Council laid down the proposition that in assessing the yearly profits and gains of a business for the purpose of the Indian Income-tax Act, 1922, each year was a self-contained period. Lord Russell, delivering the advice of the Judicial Committee, at page 297, made the following observation :

' But the losses must be losses iucurred in that year. You may not, when setting out to ascertain the profits and gains of one year, deduct a loss which had in fact been incurred before the commencement of that year. If you did, you would not arrive at the true profits and gains of the year. For the purpose of computing yearly profits and gains, each year is a separate self-contained period of time, in regard to which profits earned or losses sustained before its commencement are irrelevant.'

12. The Supreme Court in Kikabhai's case expressed the same view at pages 508-509 and observed as follows :

'... we can only take into consideration income, profits and gains made in that year and are not concerned with potential profits which may be made in another year any more than we are with losses which may occur in the future. '

13. There does not appear to be any answer to this argument from Dr, Pal, appearing for the assessee, on this point whether, in fact, there was an actual loss in this case on the grounds stated above. Therefore, apart from the authorities which we are presently going to discuss, we are bound to hold that this is not a loss at all. We hold accordingly.

14. The next questionis, how is it a business loss The whole point in this case suggests that, it is not a case of business loss. But it is a case where the assessee says that he has not got the profit at the same rate of exchange but at a lesser rate by the devaluation which was an act of the State. It is not that there has been any business loss. It is a case of saying by the assessee: 'I could have made a higher profit if the State had not devalued the Indian rupee. ' In plain reason this is not a business loss. A business loss is one that must be associated or connected with business or trading. This loss, even if any, has nothing to do with business.

15. It may be the appropriate place to emphasize that the first devaluation of the Indian rupee was on September 19, 1949, as a result of which hundred Pakistan rupees became equal to one hundred and forty-four Indian rupees and the reason was that Pakistan on that date did not devalue her currency. The devaluation of the Pakistan rupee, however, came on August 1,1955, and by that act of devaluation, the Pakistan rupee and the Indian rupee reached the parity, i.e., hundred Pakistan rupees became equal to hundred Indian rupees. The question is : is it a business loss in connection with the business of the assessee Logically, the answer seems to be that it cannot be termed or called a business loss at all even if it is a loss of some other kind.

16. We shall now proceed to examine the different decisions relevant on the point. The first case on which Dr. Pal for the assessee relied was Commissioner of Income-tax v. Canara Bank Ltd, : [1967]63ITR328(SC) . There Ramaswami J., speaking for the Supreme Court, at page 330, points out that the question involved in that appeal is whether the profits of the bank on account of fluctuation of exchange arose in the course of trading operations of the bank or whether it was incidental to any such trading operations. He observed :

' If by virtue of exchange operations profits are made during the course of business and in connection with business transactions, the excess receipts on account of conversion of one currency into another would be revenue receipts. But if the profit by exchange operations comes in, not by way of business of the bank, the profit would be capital profit. '

17. The central fact there was that the High Court found on an analysis of the relevant facts that the appreciation of the money did not arise in the course of any trading operation of the bank and was, therefore, not taxable as a revenue receipt. What happened there was that the bank had opened a branch in Karachi on the 15th November, 1946. After the partition of India in 1947, the currencies of the two Dominions of India and Pakistan continued to be at par until there was a devaluation of the Indian rupee on the 18th September, 1949. On that date the back had a sum of Rs. 3,97,221 at the Karachi branch belonging to its head office. As Pakistan did not devalue its currency the parity between the Indian rupee and the Pakistan rupee ceased to exist. The exchange ratio between the two countries was not determined uatil the 27th February, 1951. The bank did not carry on any business in foreign currency and even after it was permitted to carry on business in Pakistan currency on April 3, 1951, it carried on no foreign exchange business. The Appellate Tribunal found that the money was lying idle in the Karachi branch and was not utilized in any banking operation even within Pakistan. The State Bank of Pakistan granted permission on 1st July, 1953, and two days later the bank remitted the amount to India. In view ef the difference in values of the currencies the bank made a profit of Rs. 1,73,817. The whole point was whether that amount was a revenue receipt. The Supreme Court found first that, on the facts, the appreciation of the money did not arise in the course of any trading operation, and, secondly, even assuming that this amount of Rs. 3,97,221 was originally stock-in-trade, when it was blocked and sterilized and the bank was unable to deal with that amount, it ceased to be its stock-in-trade and the increase in its value owing to exchange fluctuation was a capital receipt. Neither of these two basic facts is available in the instant reference before us. It is also to be noted that this decision of the Supreme Court was not dealing with either Section 10(1) or Section 10(2) of the Indian Income-tax Act oi 1922. The decision really turned on capital and revenue receipts.

18. It will be appropriate at this stage to make a reference to five English cases, cited at the Bar. In Mckinlay v. H. T. Jenkins and Sons Ltd., [1926] 10 T.C. 372 (K.B.) a question cropped up about the appreciation of the Italian currency ' Lira ' by reason of the exchange fluctuation between Lira and Pound Sterling, Rowlatt J. came to the conclusion that the sum of 6,707 in that case was not a profit arising out of the contract for the supply of marble, but was merely an appreciation of a temporary investment and was not a business profit assessable to income-tax. Rowlatt J., at page 405, observed as follows :

'It seems to me that this profit out of the change from currency to currency three times does not touch the question of what the profit on the contract was at all. The profit on the contract is the difference between the sum they received and what it cost them to supply the marble, and this intermediate use that was made of the sum which they happened to have because they had got this contract has nothing to do with the profits of the contract, I think, at all. It was an accident that this sum can be identified, as I have already explained, as coming from the contract, but it has nothing to do with the profit of the contract. If that is so, what is it It seems to me it is the mere appreciation of an investment into which they had put their money temporarily; an appreciation of something, if you like to look at it one way, that they had brought forward, because they would want it later, namely, the Lire ; a temporary appreciation of which they took advantage. If you look at it the othtr way, it was a profit which they had made by buying forward, instead of waiting until they had to provide the money. I do not think it has anything to do with the profit of the contract itself... Their capital was intact; they had had cash ; they had put it into an article of commerce ; they had got it out again ; they had got all the cash they ever had, and more cash, and as far as I understand it there would be no objection to their treating that as a divisible profit as a matter of Company Law. But 1 do not think that affects the case I have got to decide. I have to decide whether they made this profit in the way of their business, as a profit of their trade or not, and I frankly say that I do not see how it really can be argued that it was.'

19. It has also to be noticed that in McKinlay's case, discussed above, it was not a question of devaluation but it was a question of ordinary market fluctuation of foreign exchange.

20. This, incidentally, marks the importance of the concept of profit. The profit has to be a business profit for that is the calculation that is being made under Section 10(1) of the Indian Income-tax Act, 1922. If allowance has got to be made for losses in calculating such profit under Section 10(1) of the Indian Income-tax Act, then such loss has equally to be a business loss and not a loss arising not in the course of business but by sovereign act or an act of State like devaluation which is not really confined to business only but is a notional devaluation of currency affecting not only business but also all interests outside business.

21. On the other hand, in the case of Landes Bros. v. Simpson, [1934] 19 T.C. 62 (K.B.), theexchange profits on the facts of that case were regarded as trading receipts. There the appellants carried on business as fur and skin merchants and, as agents, were appointed sole commission agents of a company for the sale, in Britain and elsewhere, of furs exported from Russia, on the terms, inter alia, that they should advance to the company a part of the value of each consignment. All the transactions between the appellants and the company were conducted on a dollar basis, and owing to fluctuations in the rate of exchange between the dates when the advances in dollars were made by the appellants to the company against goods consigned and the dates when the appellants recouped tlemselves for the advances on the sale of the goods, a profit accrued to the appollanls on the conversion of repaid advances into sterling. On those facts, it was held that the exchange profits arose in that case directly in the appellants' business with the company and formed part of the appellants' trading receipts and was, therefore, profit taxable under the Income Tax Act. this was also not a case of devaluation by a sovereign power.

22. In Radio Pictures Ltd. v. Commissioners of Inland Revenue, [1938] 22 T.C. 106 (C.A.), the question was whether the assessee could deduct the adverse differences in exchange in computing the profits. The court held that the assessee was entitled to the deduction. There the question was of conversion between dollar and sterling by ordinary fluctuations and not by any act of devaluation. That case also turned on the construction of the particular contract and a letter by which the English company was instructed to keep its accounts with the American company, by reference to a fixed rate of exchange, the difference between that rate and the rate prevailing at the end of the week in which any particular transaction took place being passed to a suspense account. What happened was that the English company throughout kept the books on that basis and owiug to delay in payment and a fall in the value of the pound, large adverse differences were shown in the suspense account. The case was certainly a case of loss in actual operation. In fact. Lord Greene M.R., at page 127, emphasized this aspect by saying :

' Putting all the^e facts together, it seems to me that the real matter which falls to bo decided at the outset is : what was the contract between the parties '

23. This also distinguishes that case from the iustant reference before us. In Imperial Tobacco Co. Ltd, v. Kelly, [1943] 25 T.C. 292 (C.A.) the question arose in these circumstances. The appellant. Imperial Tobacco Company, carried on business of tobacco manufacture for which large quantities of tobacco leaf were purchased in the U.S where the company maintained a large buying organisation. To finance the purchases and the expenses of this organisation, the company bought dollars in the U. K. through its bankers who remitted them to the banking accounts at the company in the U. S. It was the practice of the company to accumulate a large holding of dollars each year before the leaf season commenced. The company never bought dollars for the purpose of resale as a speculation. But then what happened was that on the outbreak of war in September, 1939, the Imperial Tobacco Company at the request of the Treasury stopped all further purchases of tobacco leaf in the U, S. As a result of that, the company had on hand a holding of dollars which had been accumulated between January and August. 1939. On September 30, 1939, the company was required under the Defence (Finance) Regulations Act, 1939, to sell its surplus dollars to the Treasury. Owing to the rise which had occurred in the dollar exchange, the sale resulted in a profit for the company. The court, on these facts, held that the profit made by the company on the compulsory sale of surplus dollars to the Treasury must be included in the computation of the profits of its trade. Here again the dollar and its accumulation was a part of the trading arrangement of the company. The sale of the dollar, even under compulsion, therefore, was a part of the trading profit. Two features must be noticed in connection with Kelly's case. One is that this was not dealing with devaluation by one State or another. Secondly, it was also a case of sale of the dollars although it was a compulsory sale to the Treasury.

24. The other English case is Davies v. Shell Company of China Ltd. : [1952]22ITR1(All) . There a British company sold and distributed petroleum products in China. That company made a practice of requiring its agents to deposit with the company a sum of money in Chinese dollars which was repayable when the agency came to an end. Previously the company had left on deposit with banks in Shanghai amounts approximately equal to the agency deposits. But, because of the hostilities between China and Japan, the company transferred these sums to the United Kingdom and deposited the sterling equivalents with its parent company which acted as its banker. Owing to the subsequent depreciation of the Chinese dollar with respect to sterling, the amounts eventually required to repay agency deposits in Chinese curiency were much less than the sums held by the company to meet the claims and a substantial profit accrued to the company. The company's contention was that the deposits received from its agent had been used as fixed capital and not as circulating capital, and, therefore, the profit on exchange was a capital profit and not subject to income-tax. The court upheld the contention that it was a capital profit on those facts. There the question really was decided on what was a capital profit or what was a revenue profit.

25. As would be clear from the brief account of the five English cases, they are all distinguishable. They do not deal with the problem with which we are concerned, how is the profit to be calculated under Section 10(1) of the Indian Income-tax Act, 1922 and whether, in doing so, loss suffered by an act of devaluation in the foreign exchange would be a matter for allowance in computing such business profits.

26. On behalf of the assessee, Dr. Pal has relied on two decisions. One is Commissioner of Income-tax v. Tata Locomotive and Engineering Co. Ltd., : [1966]60ITR405(SC) . There the Supreme Court, on the particular facts of that case, came to the conclusion that the act of retaining moneys in U.S.A. for capital purposes after obtaining the sanction of the Reserve Bank was not a trading transaction in the business of manufacture of locomotive boilers and locomotives and it was clearly a transaction of accumulating dollars for capital goods, the first step to the acquisition of capital goods. Therefore, the Supreme Court held that the surplus attributable to $ 36,123 was capital accretion and not profit taxable in the hands of the assessee. The facts in that case were as follows. The assessee carried on business in the manufacture of locomotive boilers and locomotives. For the purpose of its manufacturing activity it had to make purchases of plant and machinery in U.S.A. With the sanction of the exchange control authorities, it remitted to its agent in U.S.A. $ 33,850 for the purpose of purchasing capital goods and other expenses. As selling agent of Baldwin Locomotive Works of U.S.A. for the sale of their products in India, the assessee incurred expenses on their behalf in India and also earned commission of $ 36,123. With the sanction of the exchange control authorities the amounts paid by Baldwin Locomotive Works in reimbursement of the expenses and towards commission were retained with its agent in U.S.A. for the purchase of capital goods there. Then what happened was that the Pound Sterling and with it the Indian rupee were devalued on 16th September, 1949. Thereafter, the assessee found it more expensive to buy American goods and, as the Government of India also imposed some restrictions on imports from U.S.A., the assessee with the permission of the Reserve Bank repatriated $ 49,500. This resulted in a surplus and the Income-tax Officer assessed it as a profit arising to the assessee incidental to its carrying on business. It was on those facts that the Supreme Court came to the conclusion that it was a case of capital acquisition and not profits taxable in the hands of the assessee. At page 410 of that report Sikri J., delivering the judgment of the Supreme Court, observed as follows :

' A number of cases have been cited before us, but it seems to us that the answer to the questions depends on whether the act of keeping money i.e., $ 36,123.02, for capital purposes after obtaining the sanction of the Reserve Bank was part of or a trading transaction. If it was part of or a trading transaction then any profit that would accrue would be revenue receipt; if it was not part of or a trading transaction then the profit made would be a capital profit and not taxable. There is no doubt that the amount of $ 36,123 02 was a revenue receipt in the assessee's business of commission agency. Instead of repatriating it immediately the assessee obtained the sanction of the Reserve Bank to utilise the commission in its business of manufacture of locomotive boilers and locomotives for buying capital goods. That was quite an independent transaction and it is the nature of this transaction which has to be determined. In our view it was not a trading transaction in the business of manufacture of locomotive boilers and locomotives; it was clearly a transaction of accumulating dollars to pay for capital goods, the first step to the acquisition of capital goods. If the assessee had repatriated $ 36,123.02 and then after obtaining the sanction of the Reserve Bank remitted $ 36,123.02 to the U.S.A., Mr. Sastri does not contest that any profit made on devaluation would have been a capital profit. But, in our opinion, the fact that the assessee kept the money there does not make any difference especially, as we have pointed out, that it was a new transaction which the assessee entered into, the transaction being the first step to the acquisition of capital goods. '

27. This basic finding that it was an independent transaction for acquirirgcapital goods is the foundation of the ratio of that case. That foundationis not available in the instant reference before us. The other case on whichDr. Pal for the assessee relied was Commissioner of Income-tax v. MogulLint Ltd. : [1962]46ITR590(Bom) . In that case, a Division Bench of the Bombay High Court cameto the conclusion that if a foreign fund of the assessee is allowed to remainunused where it lay, the mere circumstance that there had been fluctuationin the currency resulting in the appreciation of the fund in terms of the coinof another country would not result in profit to the owner of the fund. Butif the fund is utilised in the course of business for a trading purpose therewould be realisation of the profit arising on devaluation and the profit wouldbe taxable. If, on the other hand, the fund is not utilised for the businessoperation for the purpose of trade but for a non-business operation like payment of income-tax in the foreign country, there could be no profit and thedifference in the exchange value could not be assessed to income-tax. Thecourt expressed the view that taxability could not be decided on the basisof entries which the assessee chooses to make in his accounts but has to bedecided in accordance with the provisions of the law. It has to be noted,however, as was pointed out by the court at pages 598-99 of that report,that in that case the asset was never remitted to India at all. There wasalso no actual conversion of Pakistan monies into Indian rupees and noincrease on conversion had actually been received by the assessee. At page599, the court observed :

' But, in order to see whether such a profit has resulted in a given case must be determined by considering the purpose for which and the manner in which the asset has been utilised. '

28. That case, therefore, on those facts, is entirely distinguishable from the present reference.

29. It is noticeable that in the present reference before us, it is an admitted fact that this money represented the assessee's Pakistan profits in Pakistan currency. Admittedly, therefore, such profits arose out of business in Pakistan. Admittedly also, this was a case of profit or even accumulated profits. Therefore, normally, it would be a trading profit or a revenue receipt even when it comes to a question of actual remittance to the head office after conversion into Indian currency. We cannot subscribe to the extreme proposition advanced by the learned counsel for the revenue that profits taxed at once become capital or profits kept even in unexplained reserve or for unexplained purposes without being earmarked become capital. Profit certainly can become capital in an appropriate context when the facts so justify. In fact, it is part of a business to extend and build capital by use of profits not used for ordinary trading or circulatory purposes. But basically, this question about capital and revenue and about trading receipts or revenue receipts or capital receipts does not arise in the present case on the view that we have taken that it is not a loss of profit and that it is not, at any rate, business profit. Therefore, allocation of the money between revenue and capital is, in such context and on the facts of this case, an immaterial consideration.

30. In that view of the matter, it will not be necessary to discuss in detail the decision in Hindusthan Aircraft Ltd. v. Commissioner of Income-tax : [1963]49ITR471(KAR) , cited by Dr. Pal for the assessee. There the sum of Rs. 1,92,136 was found to be a receipt arising from business within the meaning of Section 4(3)(vii) and was not exempt from income-tax. What happened there was that the assessee carried on business in assembling and overhauling different types of aircraft and for that purpose held dollars with banks in America which were partly received from its clients for repairs and overhaul done to their aircraft ana partly from remittances made by the assessee. The dollar holdings were utilised in the course of the business either for payments of salaries to American technicians employed in the assessee's factories or for purchasing its spare parts. The assessee had at the relevant time with its bank the balance of $ 1,98,202.75 valued at the rate of exchange of Rs. 3.44 per dollar. On September 19, 1949, the Indian rupee was devalued and the exchange rate was fixed at Rs. 4.75 per dollar. Consequent on the devaluation, there was an appreciation in the rupee value and the balance was held with the American bank to the extent of Rs. 2,80,639 against which the Appellate Assistant Commissioner allowed a deduction of Rs, 88,503 towards dollar liabilities outstanding on September 19, 1949. The question was whether the balance of Rs. 1,92,136, being the appreciation in Indian rupees of the dollar holdings, was assessable to income-tax as a ' receipt arising from business' within the meaning of Section 4(3)(vii) of the Income-tax Act. The context of that case provides that the origin of this money was stamped with trading profits. Secondly, this case did not discuss Section 10(1) of the Indian Income-tax Act but was concerned with the interpretation of Section 4(3)(vii) of the Income-tax Act.

31. Dr. Pal for the assessee also relied on a decision of the Division Bench of this court in Haji Hawed Haji Abdulla v. Commissioner of Income-tax : [1961]43ITR599(Cal) . In that case, the assessee-firm had been carrying on a general import business mainly in betelnuts, spices, oils, chemicals and petroleum products. It entered into an agreement for the import of balls, roller bearings, and other allied machine parts and for that purpose made forward purchases of dollars and sterling. Eventually, the contract did not materialise and the assessee sold dollars and sterling. As a result of such sale, a net profit of Rs. 2,59,399 was made. The assessee claimed that this amount could not be taxed because (i) it was in the nature of a capital receipt and that (ii) it was a casual receipt as it did not arise out of his business. The court held that, on the facts of that case, there were enough materials on the record to show that the amount was derived not from an unsuccessful attempt at starting a new business but from a trading activity in the course of the normal business carried on by the assessee and was, therefore, a profit of the assessee's business and not a casual receipt. We do not consider that the facts of that case and the law laid down there have any relevancy on the points for determination before us in the instant reference. There was no question of devaluation and there was no question of profit being earned in the usual course of business and repatriated to India as here in the reference before us It may be noted also that there is no discussion of Section 10(1) of the Indian Income-tax Act in that case.

32. It will now be useful to notice some of the main decisions on whichMr. Pal for the revenue placed a good deal of reliance. The first case onwhich he relies is Commissioner of Income-tax v. Mehboob Productions Ltd. : [1969]74ITR676(Bom) , adecision of a Division Bench of the Bombay High Court. The ratio of thatdecision, inter alia, was that the fact that when the exchange ratio wasfavourable the assessee had allowed the profits to be taxed was not a groundfor allowing the loss as a deduction as equitable considerations have noplace in applying tax laws. The relevancy of that principle before us inthe instant reference is that there profits earned in Pakistan were taxedwhen the exchange ratio was 100 Pakistan rupees equivalent to 144 Indian rupees, Applying this principle of the Bombay decision, the subsequent unfavourable exchange ratio, when by the act of devaluation of Pakistan currency in 1955 dropped down to the level of 100 Pakistan rupees equal to 100 Indian ruppes, would not be a ground to allow such a loss as an allowance or a deduction. There in that case the assessee-company carried on business as film producers and had a distribution agent in Pakistan. It kept its accounts in the mercantile system and showed in the accounts of some years the profits received in Pakistan and had such profits assessed to tax. It allowed some portion of the assessed profits to remain in Pakistan. On the devaluation of the currency in Pakistan, it claimed deduction of the loss on the ground that it was a business loss or at least a bad debt. The court held that it was not a bad debt and that the loss caused by the unfavourable exchange ratio by reason of the devaluation could not be allowed as a deduction. The view that we are taking on the reasons already stated follows the principles laid down in this Bombay decision.

33. The next case on which Mr. Pal for the revenue relied is Badridas Daga v. Commissioner of Income-tax, : [1958]34ITR10(SC) , a decision of the Supreme Court. This decision of the Supreme Court deals with the very Section 10(1) of the Indian Income-tax Act, 1922. The importance and relevance of this case for the purpose of our decision in the instant reference can be realised when we come to analyse the ratio of that decision. In the first place, the Supreme Court here lays down the principle that profits and gains which are liable to be taxed under Section 10(1) are what are understood to be such under ordinary commercial principles. Applying that test, it would not appear to be at all a loss or a business loss in the present reference where all that has happened is that there is ho actual loss but the loss of a prospect or what can be more accurately described by the assessee saying that he could have made a greater profit if the devaluation had not caused an unfavourable exchange ratio for him so that his profit had not been as great or as high as expected. Surely, that is not a loss or a business loss according to commercial principles and for the purposes of the Indian Income-tax Act. Venkatarama Aiyar J., delivering the judgment of the Supreme tourt, observed at page 16 of that report as follows :

' At the same time it should be emphasized that the loss for which a deduction could be made under Section 10(1) must be one that springs directly from the carrying on of the business and is incidental to it and not any loss sustained by the assessee even if it has some connection with his business.'

34. Now, here, the alleged loss for which the assessee is claiming for an allowance is a loss of the profit which he could have made if the devaluation had not caused an unfavourable exchange ratio. The act of devaluation is an act of the State and an act of sovereign power. Such an act of devaluation is extrinsic to the business and does not spring from the business at all in our view. Therefore, it is neither springing directly from the carrying on of the business nor is it incidental to the carrying on of the business by the assessee within the principle laid down by the Supreme Court in the above observation. The Supreme Court there was concerned with explaining the loss that arose in the course of business and in the course of carrying on of business and was dealing with a case of embezzlement by an employee or an agent. Applying the principle in Badridas Daga's case, it follows in our opinion that in this case the alleged loss for which the assessee is claiming for an allowance is neither a loss at all nor a business loss in any event.

35. Another decision of the Supreme Court on which Mr. Pal for the revenue relies is Commissioner of Income-tax v. Nainital Bank Ltd., : [1965]55ITR707(SC) . This also is a case under Section 10(1) of the Indian Income-tax Act. The first principle laid down in Badridas Daga's case by the Supreme Court was that when a claim is made for deduction for which there is no specific provision under Section 10(2), the question whether it is admissible or not would depend on whether, having regard to accepted commercial practice or trading principles, It can be said to arise out of carrying on of business and incidental to it and in determining that question the loss for which deduction is claimed must be one that springs directly from the carrying on of the business or is incidental to it and is not any loss sustained by the assessee even if it had some connection with his business. In this subsequent case of Nainital Bank Ltd., the Supreme Court came to the conclusion that on the facts of that case the trading loss of a business was deductible in computing the profit earned by the business. In other words, it is now a settled principle after this decision of the Supreme Court in Commissioner of Income-tax v. Nainital Bank Ltd. that in calculating taxable profit under Section 10(1), a trading loss of a business is deductible, independently of the different allowances permitted under Section 10(2) of the Income-tax Act 1922. But, then again, the Supreme Court here also emphasizes the principle laid down in Badridas Daga's case that any and every loss was not so deductible under Section 10(1) of the Income-tax Act, unless it was incurred in carrying out the operation of the business and was incidental to its operation, Subba Rao J., in delivering the judgment in the Nainital Bank's case, explained the decision of the Supreme Court in Badridas Daga's case, by discussing the question raised in Nainital Bank's casel whether the loss in /that case fell on the assessee not as a person carrying on the business of banking but as owner of funds. The learned judge observed that in the case of a money-lender, the profits he made may form part of the private funds kept in his house which he may or may not invest in his business. It is indistinguishable from his other monies. But in the case of bank monies, the deposits received by it form part of its circulating capital and at the time of the theft may form part of the stock-in-trade. That was the principle enunciated by Subba Rao J. in Commissioner of Income-tax v. Nainital Bank Ltd., that cash is the stock-in-trade of a banking business and its loss in the case of the business under varying circumstances was deductible as business loss in computing the total income of the business.

36. It is, therefore, an irresistible conclusion that in the present case the loss which the assessee is claiming is not a loss or a business loss on the tests and principles laid down by the two Supreme Court decisions. Having regard to the clear observations and decisions of the Supreme Court in these two decisions in Badridas Daga's case and in Nainital Bank's case, we do not consider it necessary to discuss in further detail the concept of profit enunciated by Moulton L. J. in In re Spanish Prospecting Co., [1911] 1 Ch. 92, criticised by Lord Buckmaster in the Naval Colliery Co. Ltd. v. Commissioners of of Inland Revenue, [1928] 12 T.C. 1017, 1047-48 (H.L.), approving Lord Herschell's concept of profit for the purpose of income-tax in Russell v. Aberdeen Town and County Bank, [1888] 2 T.C. 321, 327 (H.L.). The English controversy centered round the question whether profit should be taken in a commercial or trading sense or whether it was a different kind of concept under the Income Tax Act. Having regard to the clear pronouncement of our Supreme Court on this point that profit should be understood in the commercial sense, we do not propose to discuss this English controversy in detail here.

37. Mr. Pal also generally distinguished the cases cited by Dr. Pal by saying that in most of those cases there was disparity at the material time of assessment in the exchange ratio unlike the equality of the exchange ratio as in the present case and they were more concerned with the distinction between revenue receipt and capital additions.

38. There remains another short point to which a short reference has to be made in this connection. That concerns the Central Board of Revenue Circular No. 16 (XL-10) of 1953, No. 73(33)-I.T./52 dated the 8th July, 1953, and the subsequent exchange of correspondence between the Central Board of Revenue and the secretary of the Indian Chamber of Commerce dated the 22nd May, 1956, and the 2nd July, 1956. The Income-tax Officer expressed the view that a reading of this circular showed that it waa irrelevant for the purpose of this question. The Appellate Assistant Commissioner also came to the same view that the circular of the Board was not applicable to the case under consideration. Apparently, before the Tribunal, nobody relied on this circular of the Central Board of Revenue and the Tribunal makes no reference to it.

39. Now this circular of the Central Brard of Revenue reads as follows :

' Sub--Pakistan income arising in--Conversion into Indian rupees.

The Indian currency was devalued with effect from the 19th September, 1949. In computing the total income of an assessee for any previous year ending after that date, the income arising in Pakistan should be converted into Indian rupees at the rate of Rs. 100 (Pakistan) equal to Rs. 144 (Indian). Where, however, the income from Pakistan was actually remitted to India at a lower rate of exchange? the difference between the above mentioned 'official' rate and that lower rate may be allowed by the I.T.O. as 'loss on exchange'. The result will be that in every case there will be uniform rate of exchange, namely, the said ' official ' rate, subject to deduction of ' loss on exchange' arising from actual remittances.'

40. Now, plainly on its terms, the circular does not app)y to the facts of the present reference. The circular was only concerned with i.he Indian devaluation on the 19th September, 1949. The present reference is concerned with the exchange loss alleged to arise from Pakistan devaluation on the 1st August, 1955. Prima facie, therefore, this circular is inapplicable to the facts of the present reference. Secondly, this circular speaks of the loss on exchange where due to the Indian devaluation of the 19th September, 1949, there was an actual remittance to India from Pakistan at a rate lower than the official rate of exchange. Such an actual remittance has not taken place in the facts of this case before Pakistan devalued its currency on the 1st August, 1955. Thirdly, this circular was concerned only with the difference between official and unofficial rate of exchange, a point with which we are not concerned in the present reference at all for there is no question of any unofficial rate of exchange here and it is not the assessee's contention that actual remittance was made on the basis of the unofficial rate of exchange. It may be pointed out here that the dates of actual remittance in the present case were the 2nd July, 1956, and the 24th April, 1958, both dates being after the date of Pakistan devaluation on the 1st August, 1955. The utmost use that could be made of such a circular is to say that the Central Board of Revenue was aware of a kind of actual exchange loss in appropriate circumstances whore remittances in fact had been made at a rate lower than the official rate, controversy with which the subsequent correspondence between Indian Chamber of Commerce and the Central Board of Revenue was concerned, but which does not arise in the facts of this case before us. We, therefore, do not think that this circular at all helps the assessee's contention in this case.

41. The question of exchange loss due to fluctuations in the international money market and the currencies of different States may arise in different circumstances and context. It will be dogmatic to assert that under no circumstances exchange loss can be a trading or a revenue loss which cannot be allowed in calculating the profits of a business under Section 10(1) of the Indian. Income-tax Act, 1922. That will be in our view too sweeping a generalisation and formulation of the law on the point. The question as the Supreme Court has said is to be determined on the basis of the calculation of the profit under Section 10(1) and in doing so the commercial concept of what a profit is should be the first and paramount consideration. A profit is a surplus basically and essentially after allowing fur certain losses which again must be business losses in the sense that the loss must arise out of the business or to use the expression of the Supreme Court, ' springing directly from' the business or is incidental to it. Normally, a difference is obvious in the ordinary day-to-day fluctuations of the foreign exchanges of the different currencies of the different States. That is determined by the rise and fall of prices and the demand and supply of particular foreign exchanges in question. In that sense each currency is a commodity, as some of the authorities have said that dollar is a commodity. In fact any currency unit in any country is a commodity from that sense. Economically, however, a currency unit is not only a commodity but also is itself a measure of value but when it comes to exchange of one currency to another it acquires some of the characteristics of a commodity and its price rises and falls according to the demand and supply in the international money market for the relevant currencies. It is possible in that context, for instance, a banker or a trader or a business man whose business it is to deal in foreign exchanges, to say that ordinary currency losses due to such fluctuations in the international market of exchanges of currencies should be regarded as trading losses and for which allowance should be made in calculating the profits of the business concerned; but entirely different considerations apply where the assessee is not a dealer of foreign exchange or in any way associated with the foreign exchanges or having to sell or buy foreign exchanges in terms of its business commitments as discussed in some of the cases we have analysed. Then this question has to be answered on the facts of each case. In many of the ordinary cases it would seem that these losses could not be claimed as an allowance subject of course to exceptions under certain circumstances.

42. Again, very different considerations apply where there is an exercise of a sovereign function like an act of devaluation. Now, the act of devaluation is extrinsic to the trade or business. It is done under the sovereign function of the State whose general and uaiversal impact affects every one, those io the business and those outside it. In such circumstances, exchange losses due to devaluation may not be a recoverable amount or a recoverable allowance. It is difficult to imagine, for instance, that a trader or any person could have a right to sue the Government for a loss it suffers by reason of the devaluation. The reason is that it is not springing from the trade or business or incidental to it. But, then again, in limited circumstances and on particular facts, even such a devaluation may permit a loss or a profit to be allowed for or taxed, as, for instance, in the case that we have already discussed where there was a compulsory sale by an assessee to the Treasury of an accumulated amount of dollars which arose entirely under the trading agreement in trading context resulting in the profit and where the court held that, in spite of the fact that it arose out of devaluation, and, no doubt, under compulsory powers of the State, yet it was a trading profit and, therefore, taxable. That is the reason why we say that there cannot be a cut and dried formula and a dogma in this respect to say that under no circumstances an exchange loss either for devaluation or due to any other cause can ever be allowed in computing profit. Whether it will be allowed or not is to be determined by the basic tests laid down by the Supreme Court, that it is a loss which springs directly or indirectly from the business itself and/or incidental to it.

43. For these reasons,' we answer question No. 1 by saying that the assessee's claim for the exchange loss of Rs. 11,00,000 for the assessment year 1957-58 and Rs. 5,50,000 for the assessment year 1959-60 is not allowable as a deduction and we answer the question in favour of the revenue.

44. On the 2nd question, the facts have already been set out elsewhere in this judgment. It relates to two sums of Rs. 1,170 and Rs. 3,573 in respect of law charges arising in connection with business profits tax appeals for the assessment years 1957-58 and 1959-60. We are satisfied that this question must be answered in favour of the assessee and against the revenue. We are of the opinion that these law charges are allowable as deductions. In taking this view, we are only following a Bench decision of this court in Commissioner of Income-tax v. Calcutta Landing & Shipping Co. Ltd. : [1970]77ITR575(Cal) . That decision was based on the Supreme Court decision in Sree Meenakshi Mills Ltd. v. Commissioner of Income-tax, : [1967]63ITR207(SC) , where the Supreme Court had observed that the expenditure on civil litigation commenced or carried on by the assessee for protecting the business was an admissible expenditure under Section 10(2)(xv), provided, of course, other conditions are fulfilled, even though the expenditure does not relate directly to the earned income. The Calcutta decision also considered the other Supreme Court judgment in Travancore Titanium Products Ltd. v. Commissioner of Income-tax, : [1966]60ITR277(SC) .

45. As the third question has neither been argued nor pressed, we do not answer that question.

46. The 4th question relates to the interest amounting to Rs. 5,236 paid on funds invested in shares. The taxing authorities and the Tribunal refused to allow this on the ground that the investment in the shares relating to this interest did not produce any dividend income and in doing so the Tribunal was following a Bench decision of this court in Madanlal Sohanlal v. Commissioner of Income-tax : [1963]47ITR1(Cal) . The ratio of that decision is that, in allowing an expenditure under Section 12(2), it is not necessary that the investment should result in a profit but there must be some gross income or return and where there was no income or return at all in the sense that out of such income or return some deduction is to be made, then such an expenditure could not be allowed under Section 12(2). The basis is that Section 10(2) speaks of ' after making the following allowances. ' Naturally, the allowance is to be made from the profits computed or gains computed. If there is no profit or gain, then there can be no question of making an allowance from anything. That does not, however, mean that each particular share will have to produce a particular return. That is exactly where the Tribunal went wrong in construing that decision. Here, on the facts, it is found at page 11 of the paper book that under Section 12 under the head ' Other sources of income ', the item 'dividend certificates' shows Rs. 27,548 as against the gross figure of Rs. 36,847. It is obvious, therefore, that there was a dividend income or return from which this allowance for interest amounting to Rs. 5,236 could be made. This principle is clearly laid down by the Supreme Court in Commissioner of Income-tax v. Indian Bank Ltd., : [1965]56ITR77(SC) , although that was a case on Section 10(2)(m)/(xv) and not on Section 12. For these reasons, we answer question No. 4 by holding that the sum of Rs. 5,236 is allowable as a deduction and we answer the question in favour of the assessee and against the revenue. The fifth question has not been argued or pressed before us and, therefore, this court does not record an answer on the same.